WAGS Gets the Boot(s)

I hate to harp on another misstep by Walgreen Co., but I'll throw in my take on Walgreens' June purchase of a ~45% stake in Alliance Boots, a European retail and pharmacy chain.  Alliance Boots has a retail/pharmacy line of business and a pharmaceutical wholesale side.  On its face, this buy looks like it might have some pluses for Walgreens:  acquiring a stake in a large European chain, economies of scale through larger purchasing power with manufacturers, negotiating leverage with PBMs, and access to a distribution network in Europe.  Lets look at those one by one.  

Is overseas expansion a good thing?  Well, if you can buy into any business at the right price then it is a smart investment.  Did they get a good deal on Alliance Boots?  At nearly 7 billion dollars for a minority stake, the markets didn't think so.  WAGS dropped on the deal and is currently trading at about 10% below the price before the deal was announced.  Another take:  Alliance Boots is owned by private equity firm KKR and Stefano Pessina, the combination of a well-regarded investment firm and an extremely successful businessman and entrepreneur.  Not very likely those two entities let something go for a price that isn't attractive from the seller's point of view.  

Economies of scale in negotiating with both manufacturers will likely be difficult to reconcile with the different pharmaceutical pricing practices in the U.S. versus Europe.  Europe, to generalize, doesn't have as free a market as the U.S. does in terms of how pharmaceutical manufacturers price their products to wholesalers.  Moreover, drugs approved in the EU may not be approved in the U.S. and vice versa, complicating matters.  Negotiating firm wide, i.e. leveraging both Alliance Boots and Walgreen's pharmacy business when dealing with manufacturers, if at all feasible, seems likely to prove quite cumbersome

The investment in Alliance Boots does absolutely nothing to address Walgreens' problems at home with Express Scripts and falling prescription volume.  The pharmacy benefit model is another example of U.S. practice different in other countries.  I can't imagine the large U.S. PBMs seeing any value in Walgreen's new global network.  The purchase also does nothing to address what I consider the elephant in the room with regards to the standoff between Walgreens and Express Scripts:  what is happening with all the Medco covered patients whose employers’ benefits contracts are expiring?  My early guess is that Walgreens is losing these patients, just at a slower, less noticeable pace than the January Express Scripts exodus.  

Walgreens, like all major chains, uses their own wholesale warehouse for some medications their retail pharmacies stock.  Thus, there may be some possible knowledge exchange and trade tips to learn from Alliance's wholesale division.  However, any major synergies would have to come from establishing a global supply chain.  This simply isn't possible due to the differences in approved drug entities as mentioned earlier, as well as laws governing the sale of pharmaceuticals in the U.S., particularly with respect to reimportation.

In my view, the major positive of the deal is that it has made it look like Walgreen Co. is at least taking action to turn their business around from the slide it has been in.  However, real, substantive action that addresses their core market will be required to justify a higher stock price, not just headline grabbing acquisitions.